The current position of the Australian equity market suggests a downtrend in the short-term (small picture) with the long-term (bigger picture) trends starting to turn too. What we need is a simple strategy that enables investors or traders to make decisions to move money with the main trends, rather than against them. Something to cut through all the 'noise' in the markets.
Regular readers of the Yahoo finance pages are exposed to opinions and views that vary greatly. This makes the markets interesting and offers opportunities to profit. I classify myself as a trader rather than an investor, which means I tackle the market in terms of trend and direction - up or down - and I have the knowledge to take advantage of these moves. These 'moves' are often measured in days, as opposed to the typical investor's time-frame of months or years.
The standard investor is intellectually and financially locked into a long-term mindset and they typically don't adjust their holdings on the small moves markets make. Traders employ methods that do not allow for the market to move too far either way before they take action. The pay-off for being more active is greater rewards but there is also greater risk. (More from Aaron Lynch: Europe Is Resolved? Buy The Rumour Sell The Fact?)
Regardless of your time horizon or whether you call yourself a trader or an investor, you should have a defined method to determine the likely direction of a holding and a plan specifying what to do if it does not deliver.
An article in last weekend's papers looked at the best and worst superannuation fund returns - and they were far from spectacular. More and more investors are 'self-managing' rather than paying high fees for underperformance to retail fund managers. Sadly, many saw their accounts decimated before they decided to take control. But there is no point in taking control unless you know what you are doing. If the GFC taught us anything, it's that the more things change (like access to markets and technology), the more they stay the same (like the importance of asset allocation, trend determination and risk management).
And so, to market. The question I am asked most often is how bad / good will the markets get? Well, differences of opinion are what makes the markets tick but for me, the risk is to the downside. Today, the ASX 200 saw drops across the majors and we are now a lot closer to the year's lows than the year's highs. In the chart below you can see that as at 22 November, we are well under the half-way point for the calendar year.
I use multiple charting and technical methods to determine trends over multiple time-frames. The daily and weekly charts are in downtrend, while the monthly chart is showing an uncertain trend. Taken together, these three point to tougher conditions for 'buy and hold' investors who do too little research before diving in.
The global perspective is still very uncertain and volatility is likely to continue. The market could retest the August low before it approaches the April high. Remember, traders actually don't really worry about market direction so much as what trends are coming and how to harness that opportunity to profit. (More from Aaron Lynch: Who's For The Heavy Lifting?)
There will always be those who adapt and seek new skills and those who persist with the same strategies regardless. In uncertain economic times such as these, whatever your investment time-frame, whether you are an investor, a trader or even just a mug punter, you MUST have a plan. Ask a question, seek advice, get an education, look for guidance and learn from experience. Find out how to offset losses in your share portfolio or discover how to utilise other market spaces like currencies or commodities.
The landscape of the markets is changing - will you adapt or perish?
Good Trading
Aaron Lynch
